Business context and reporting period
Lineage Cell Therapeutics, Inc. (NYSE American: LCTX) filed this Form 10-K for the fiscal year ended December 31, 2021. It is a clinical-stage biotechnology company developing allogeneic cell therapies. Its clinical programs are OpRegen for dry age-related macular degeneration (AMD), OPC1 for spinal cord injury, and VAC2 for non-small cell lung cancer; other programs remain preclinical. The financial statements are audited, and the auditor issued an unqualified opinion.
Financial results and liquidity
Unless noted otherwise, amounts are in U.S. dollars; financial statement figures below are in millions.
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $4.34 | $1.83 |
| Cost of sales | $1.43 | $0.39 |
| Gross profit / margin | $2.92 / 67% | $1.44 / 79% |
| Research and development expense | $33.91 | $12.32 |
| General and administrative expense | $18.21 | $15.57 |
| Operating loss | $(49.21) | $(26.45) |
| Net loss attributable to Lineage | $(43.02) | $(20.65) |
| Net loss per share | $(0.26) | $(0.14) |
| Cash used in operating activities | $23.56 | $19.75 |
- Revenue grew 138%, mainly from a $2.00 million increase in royalties and $1.12 million of collaboration revenue, partly offset by lower grant revenue. Royalties were 63.9% of 2021 revenue; grants were 10.3%.
- Reported gross margin declined year over year. Cost of sales includes royalty-sharing expense; the filing attributes approximately $1.8 million of additional royalty revenue to updated information from a royalty customer and records 50% of those additional royalties in cost of sales.
- R&D expense rose 175%. It included $21.0 million of IIA and Hadasit obligations related to the Roche agreement, as well as higher OpRegen and OPC1 activity. G&A increased 17%, including higher stock compensation, merger-related litigation, and legal and patent costs.
- Other income, net, was $5.94 million versus $4.52 million. It included a $6.02 million realized gain on sales of marketable securities, partly offset by a $2.30 million unrealized loss; the PPP loan forgiveness contributed a $0.52 million gain. Results therefore include material investment-related and other non-operating items.
- At year-end, cash and cash equivalents were $55.74 million and marketable equity securities were $2.62 million; management reported combined cash, equivalents, and marketable securities of $58.4 million. Working capital was $64.4 million, total assets $174.5 million, total liabilities $83.6 million, and shareholders’ equity $90.9 million. Accumulated deficit was $337.1 million.
- Operating cash outflow was $23.6 million; investing activities provided $9.7 million, principally from OncoCyte share sales; financing activities provided $36.9 million, principally from ATM share sales and employee option exercises. Cash, cash equivalents, and restricted cash ended at $56.3 million.
- The balance sheet included $50.5 million of deferred revenue and a related $50.6 million receivable, largely reflecting the Roche upfront payment accrued in 2021 but received in January 2022. The company then paid $12.1 million to the IIA and $8.9 million to Hadasit. Year-end current liabilities of $47.1 million included substantial accruals and deferred revenue; they should not be read as funded debt. No material conventional borrowing balance is identified; operating and finance lease liabilities totaled approximately $2.8 million.
- In the unaudited fourth quarter, revenue was $1.17 million, operating expenses $29.20 million, operating loss $28.24 million, and net loss attributable to Lineage $28.99 million. The quarter’s expenses were notably affected by the Roche-related IIA and Hadasit charges.
Material changes versus 2020
- Annual operating loss widened to $49.2 million from $26.4 million, and net loss attributable to Lineage more than doubled to $43.0 million from $20.6 million.
- R&D increased by $21.6 million, with OpRegen and other ophthalmic work accounting for $25.5 million, or 75% of 2021 R&D expense. OPC1 expense was $6.1 million; VAC expense was $2.2 million.
- Revenue composition shifted: collaboration revenue began contributing $1.12 million, royalties increased to $2.78 million, and grant revenue declined to $0.45 million from $1.05 million.
- Cash and cash equivalents increased to $55.7 million from $32.6 million, while marketable equity securities declined to $2.6 million from $9.0 million, in part reflecting share sales and market-value changes. Common shares outstanding rose to 169.5 million from 153.1 million.
- Deferred revenue increased from $0.2 million to $50.6 million, predominantly associated with the Roche agreement. The company also recorded $21.0 million of related IIA and Hadasit expenses/accruals.
Outlook, management commentary, risks, and contingencies
- Roche/OpRegen: Under the December 2021 agreement, Roche has exclusive worldwide development and commercialization rights to OpRegen and related RPE therapies. Lineage is eligible for up to $620 million in additional development, regulatory, and commercial milestones plus tiered double-digit royalties. These future payments are contingent; the IIA and Hadasit have contractual participation in proceeds, and milestone and royalty rights are subject to stated conditions. Roche may terminate the agreement with notice.
- Clinical outlook: Management described interim OpRegen findings as encouraging, including retinal structural observations in four Cohort 4 patients and reported visual-acuity differences between treated and untreated eyes. The trial is small, open-label, and early-stage; the filing cautions that interim results may change and are not predictive of later trials. OPC1 remained in long-term follow-up, with manufacturing and delivery-device work underway; VAC2 remained in Phase 1.
- Liquidity and funding: Management said year-end resources were expected to fund planned operations for at least 12 months from issuance of the financial statements, also citing the post-year-end Roche cash receipt and available ATM capacity. The company expects ongoing losses and substantial R&D spending and may need further financing. The ATM program had $63.9 million remaining available at year-end; additional share issuance could dilute holders.
- Key risks: clinical and regulatory uncertainty; dependence on Roche and other partners; cash burn and financing access; manufacturing scale, single-source suppliers, and clinical supply; COVID-related trial disruption; patent and licensing challenges; reimbursement and competition; and privacy, cybersecurity, and regulatory compliance. The filing states that the pandemic had affected enrollment and could continue to disrupt trials and operations.
- Contingency: A putative class action concerning the 2019 Asterias merger remained pending in Delaware, with trial scheduled for October 2022. Lineage disputed the allegations; it stated that the potential loss was not probable or estimable and recorded no accrual.
- Controls: Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The company was not required to obtain, and its auditor did not provide, an audit opinion on internal control effectiveness.
Important facts for investors to verify
- Review the Roche agreement’s milestone conditions, termination provisions, royalty offsets, and the IIA/Hadasit sharing obligations; distinguish the $50 million upfront receipt from contingent future payments.
- Track finalized clinical data and subsequent trial design, regulatory interactions, safety findings, and manufacturing comparability for OpRegen, OPC1, and VAC2; do not treat interim OpRegen findings as proof of efficacy.
- Reconcile ongoing cash burn and operating plans with the reported liquidity runway, post-year-end Roche payments, ATM usage, and potential dilution.
- Assess the sustainability and source of royalty revenue, including the customer’s updated royalty information and associated cost-of-sales sharing.
- Monitor the Asterias merger litigation and any change in the company’s assessment of potential loss or related costs.